Can a TFSA Be Paid to the Estate After Death in Canada?

You are the executor, you have found a Tax-Free Savings Account (TFSA), and no beneficiary or successor holder is named. The first question is usually whether the account simply becomes part of the estate, and whether the tax-free status survives.

This article explains, in general terms, what happens under federal tax rules when a TFSA is paid to the estate. The details depend on the account type and the timing, so a lawyer or accountant can confirm your situation.

This article covers Canadian federal tax law, which applies in every province.

What happens when no one is named

When no successor holder and no beneficiary is named, the TFSA assets are directed to the deceased holder's estate, and the will governs how they are distributed.

A successor holder is different. That is a surviving spouse or common-law partner named in the contract or will who takes over the account itself. Anyone else named is a designated beneficiary, who receives the account's value rather than taking over the account.

Naming matters because the designation is set with the TFSA issuer, so the holder contacts the issuer to change it. When a successor holder does take over, the issuer informs the CRA of the change in ownership. Whether anything can still be done about a missing designation after the holder has died depends on the situation, so it is worth confirming with a lawyer.

How the money is taxed

Beneficiaries generally pay no tax on amounts up to the TFSA's fair market value at the date of death, and that amount passes tax-free with no reporting required.

Earnings made after the date of death and before the estate is settled are taxable. The tax-free part is limited to the fair market value at death.

Fair market value means the highest price, expressed in money, obtainable in an open and unrestricted market between informed, prudent parties dealing at arm's length, neither under compulsion to buy or sell.

How the estate itself reports post-death income is not something to guess at. It depends on the facts, so confirm it with an accountant.

Account type changes the result

When a deposit stops being a TFSA, it is deemed disposed of at fair market value immediately before that time. The same applies to a trust that stops being a TFSA.

For a trust TFSA, the exempt period ends at the earlier of the end of the year following the year of death or when the trust ceases to exist.

Points to watch as executor

• Get the date-of-death value in writing from the issuer, since the tax-free part is tied to it.
• Ask the issuer what type of TFSA it is, because the post-death rules differ.
• Check whether the deceased had an excess TFSA amount. It is taxable to the deceased at 1% per month for each month it stays in the account, up to and including the month of death, and the legal representative files Form RC243 and Schedule A (RC243-SCH-A).
• If a qualified donee is named as beneficiary, funds generally must be transferred within 36 months of death, and the executor may then ask the CRA to amend the deceased's return to claim the donation credit.
• Quebec does not recognize successor holder designations, so ask a lawyer how that affects an account there.

Whether the account is subject to probate is a provincial question. It depends on the issuer and local rules, so confirm it with a lawyer. Likewise, the time a financial institution takes to pay out is not a federal tax rule, so ask the issuer.

What to do next

• Obtain a copy of the death certificate and the will.
• Contact the TFSA issuer and ask for the type of account, the designations on file and the value at death.
• Ask the issuer to explain any post-death earnings and how it will report them.
• Check for any excess TFSA amount before distributing.
• Speak with a lawyer or accountant about the estate's reporting before paying beneficiaries.

Frequently asked questions